Cliff Asness: Sticking With Your Strategy When It Gets Really Hard

During the latest Management Conference ’21: Keynote Conversation with Cliff Asness, David Booth, and Eugene F. Fama, AQR’s Cliff Asness discusses the important of sticking with your strategy, especially when it becomes really hard. Here’s an excerpt from the conference:

Asness: This is a little depressing and a little wonderful at the same time. But I don’t think the world grasps how small the edge is in so many things that we do. It’s not just the value premium. The value premium I think is probably a pretty similar risk-adjusted return to at least one major country’s equity risk premium. The chance you see 25 years that are disappointing, flattish, in an equity market is I think equal. It just happens not to be what we’ve seen recently.

So our jobs, to echo David also, is to put together a whole bunch of things that are good but far from very, very strong, at least short-term risk-adjusted returns that we believe in, that we really think are right, and make a portfolio of them and then stick with them. And when people say, but that’s really hard, I literally respond, you have literally no alternative. Your alternative is what David calls gambling.

So I think it would behoove our field more to admit, and Gene’s always been great about this, how low the power is at even medium terms. But when you’ve built up a body of evidence, you expect that, you don’t put all your eggs in one basket, including value, which we all love. And you build a portfolio of things with modest risk-adjusted returns.

And I think the chances of a broad portfolio including the equity premium, the bond premium, a few other factors, of that having a bad 25 years is much, much smaller. Never goes to zero, but it’s much, much smaller. But I think the world is just uncomfortable with how uncertain, even what we might call the medium diverging on the long-term, can be.

You can watch the entire conference here: